Outbreak of silence or destruction

In the past decade, the impact of the Conservative austerity plan under Cameron has been steadily accumulating, but last winter, this trickle turned into a torrent. Everything began to become fragile. For investors, if there is no unpleasant external impact, they may be able to avoid disasters. Even though the impact of reducing public services is a little hard to hide, investors may get away with it as it gets worse.

This is not the case. In recent years, Britain has been hit by the pandemic, the energy crisis and the Brexit. Britain's fragile and tired public service will yield to the pressure of a healthy system. These data paint a bad picture of the economy from stagnant wages and frozen productivity to the increase of chronic diseases and the kneeling down of medical services. Ten years of spending cuts have made Britain more vulnerable to external shocks. The bad news is that these effects are beginning to lead Britain into recession.

According to January data,business activity in the UK private sector has continued to decline. Although not modest, the overall decline has accelerated to the fastest pace in two years. Service provider growth has weakened significantly since December, with respondents citing rising interest rates and falling consumer confidence as key factors hindering business activity. In addition, the UK will reduce its green subsidies this month, which will further hurt investor confidence. At the same time, the cost of survival for businesses and consumers has also increased sharply. Although the UK government says we have deployed growth plans. However, on Friday the business lobby criticised Chancellor Jeremy Hunt's keynote speech on the government's plan to promote economic growth, complaining that the government was not offering a new policy. The policy focuses on business, education, employment and the ‘4E's’concerns anywhere- -referring to reducing regional inequalities.

For right now, Britain still faces high inflation and a severe shortage of the Labour market. As Britain prepares to go into recession, the problems of the skills gap and low business investment need to face.

In terms of the Labour market, the unemployment rate of 3.5% was the lowest level since 1974, according to the Office for National Statistics in October. Traditionally, We will think that this is a good news. However, this minimum level is just an illusion. This is due to the fact that large numbers of people are counted as inactive, not unemployed, because they are not employed or unable to start work. That means a new uptick in economic activity. The prediction was also taken true this year. GDP is already shrinking and will shrink for most or the whole of 2023.

Moreover, the problem corresponding to low unemployment is a severe shortage of the post-Brexit labor market. Jonathan Portes and John Springford published a joint paper for the UK's Changing Centre for European and European Reform, assessing the UK labor market shortage caused by Brexit. They are 330,000-about 1% of the UK workforce-but the shortage of workers from the EU falls more on low-wage sectors that previously relied on flexible EU labor, such as logistics (128,000 or 8% of sector labor); hotels and restaurants (67,000,4%), shops (103,000,3%), and construction sites (46,000,2%). Unlike the Labour market shortage in the US, the problem is that the UK has a point-based system to lower the visa threshold. The fact is that many businesses rely on the EU workforce but do not have the equipment needed to guarantee the visa. On the other hand, salary is also an important factor. For example, most social care workers in London, South East England and outside Scotland still do not have enough salaries to meet the lower wage threshold for obtaining visas. These two factors also lead to the phenomenon of labour shortage. The shortage is particularly severe, especially in the transport industry. Some may argue that Britain's exports to the EU have returned to pre-pandemic levels, but the impact of the Brexit headwinds is relatively clear. As Hunsaker told me: ‘Looking in the bubble, we're back in our place, which sounds great until you realize that all the other countries are gone.’

As shown in the figure above, we can find that the labor shortage in the transport industry is relatively prominent. This may have a greater impact on the UK's supply chain. However, the supply chain crisis is only a trigger, and other effects will slow the UK's follow-up. It is well known that the commodity trade sector ships the raw materials such as oil, gas, sugar and gold around the world and is the engine of the global economy. However, the problem of labor scarcity in UK transport will lead to further increases in transport costs, combined with high interest rates driving raising commodity prices and the financing costs needed to transport these goods. In addition, the UK needs to consider that the transition from oil and gas to electricity and renewable energy could further aggravate the "regionalization" of commodity trade flows.

In response, the British government began to encourage the construction of green energy to please the impact of fossil fuels. However, this approach will not work very much. From the chart above, BP has lowered its outlook on oil and gas demand. That's because they believe the turmoil triggered by Russia's invasion of Ukraine will push countries to pursue greater energy security by investing in renewable energy over the next decade. If the UK could create a package, demand for these fuels would fall but it would cost more support, including policies to promote faster licensing and approval for low-carbon energy and infrastructure. Dale says that events in the past period also show how relatively small energy supply disruptions can lead to severe economic and social costs, highlighting the importance of an orderly transition from hydrocarbons. Therefore, the demand for hydrocarbons must be " consistent with the available supply. That means the impact of fossil fuels on commodities is inevitable. A natural decline in existing fields means that investment in oil and gas production is still needed over the next 30 years, even under a ‘net zero’?outlook.

This is an ideal problem, but the UK's supply chain shortage has become a drag. On last Monday, Britain proposed a carbon border tax as part of an aid package for the steel industry. The plan is to introduce a carbon border adjustment mechanism that forces importers to bear the cost of carbon emissions from foreign steel. The ministers expected that the package was enough to encourage the two companies that jointly operate the remaining four UK blast furnaces to invest in less carbon-intensive electric arc furnaces. The reality is that Britain still has 4,000 jobs, most of them at a Scunthorpe plant and thousands of jobs at risk in the supply chain. If the supply chain problem cannot be solved, the plant will be forced to close one of its two blast furnaces.

Supply chain problems have not only affected the UK's future plans, but also the UK manufacturing faces the same problem. In the case of car manufacturing, which fell to its lowest level in more than half a century in 2022 after a year of supply chain disruption and a series of factory closures. The number of cars produced fell 9.8% to 775,014, the worst year since 1956, according to data released Thursday by the Association of Automobile Manufacturers and Dealers. The main reason is the inability to control the rising cost caused by supply problems by finding low-cost parts. Some factories have had to be shut down for these reasons.

As things stand, the UK's recession is a foregone conclusion. Cost pressure will be the main factor for the next year. The private-sector economy continued to slow down in January, according to the latest survey. Overall input-cost inflation fell for the second straight month, to its lowest level since April 2021. According to survey respondents, wage pressure was a factor in rising business costs, but this was offset by lower fuel bills, commodity prices, and transportation costs.

The increase in costs over the past few years is considered the biggest factor in the company's troubles last year. At the height of the pandemic in 2020,35% of UK-listed companies issued profit warnings. Of the 203 profit warnings posted in 2021,305 were issued in 2022, with a record number of warnings citing rising costs. More than a third of listed companies in the UK consumer sector issued earnings warnings during the year. On last week Friday, Superdry became the latest retailer to warn of its profit forecast for the year, sending its shares down 17%. While consumer-facing sectors continue to be most affected, Ernst & Young said the pressure in all sectors is 'deepening'. Half of the warnings issued in 2022 were because rising costs doubled in 2021.

Businesses will continue to come under pressure in 2023, as the UK faces a recession, high inflation and a strike. Jo Robinson, a partner at Ernst & Young, said 2022 was a challenging year for UK companies, with rising operating costs, changing consumer behavior and the cost of living crisis having a serious impact on the consumer-facing industry. The decline in business activity in the private sector is often attributed to a squeeze in household income, increased risk aversion among corporate clients, and a subsequent decline in business investment. A fragile customer demand backdrop led to a continued drop in new jobs in January. However, the overall decline in new orders was not significant, the lowest level since August 2022. Intake of new business fell slightly again, causing less capacity pressure in January. This indicates that the number of work logs declined for the third consecutive month and employment declined declined. But it is not all bad news. Layoffs are most prevalent in manufacturing, but service providers are likely to see upward employment in 2023. Business expectations for this year will improve significantly in January. The business expectations index has rebounded each month after its October 2022 low, with the latest data showing the strongest optimism in eight months. Confidence in both manufacturing and services has risen on hopes of an improved global economic backdrop in 2023 and lower domestic inflationary pressures.

To sum up, the problems facing the UK are ultimately the legacy problems caused by Brexit. There is no denying that COVID-19 and the Russia-Ukraine conflict have accelerated Britain's recession. However, things might have been more optimistic if Britain had not left the EU. It is unclear whether business confidence in the UK will be restored this year. Despite the data support, I am still pessimistic from the reality. For now, the British government still lacks action. As Romi Savova, chief executive of fintech group PensionBee, said, while fintech is considered a top priority, actions speak louder than words. The most prominent example is that we have yet to see concrete next steps in the UK data protection approach, with open banks lagging behind on the international scale and the lack of pension conversion guarantees continuing to put the pension sector in the dark age.